UK Outsourcing Index Finds Growth in HR Contracts

Average deal value for HR outsourcing rises by 24% year-on-year in the third quarter of 2014, according to figures from the latest Arvato UK Quarterly Outsourcing Index.

The average value of HR outsourcing contracts rose by 24% year-on-year in the third quarter of 2014, according to research from Arvato UK. The findings, from the third Arvato UK Quarterly Outsourcing Index, also reveal another strong performance for outsourcing in the central and local government market, against a backdrop of reduced activity overall.

The index, produced by Business Process Outsourcing (BPO) firm Arvato UK and industry analyst NelsonHall, reveals that the average value of HR outsourcing contracts has risen from just over £8 million in Q3 2013 to £10 million in Q3 2014.

Arvato says this strong year-on-year growth reflects a healthy, on-going demand for services such as recruitment, benefits administration and payroll outsourcing and the continued development of more sophisticated partnerships between clients and outsourcers.

The latest data also shows that HR services represent a quarter of all UK outsourcing deals agreed so far in 2014. The study found that private sector clients were behind 92% of all HR outsourcing contracts signed since January, with companies providing business services – including professional, property and people services – the most active buyers, accounting for 39% of deals. They were followed by manufacturers, which accounted for 22% of contracts.

The most popular HR service lines procured in 2014 so far were benefits administration, with 48% of deals, followed by recruitment (36%) and learning and development services (8%).

Outsourcing performance in Q3 2014

The rise in average contract values for HR outsourcing comes despite a slight softening in UK outsourcing activity in the third quarter of 2014. In total 25 deals, worth £421 million were identified by the index between July and September 2014, which compares to £734 million spent in the second quarter of the year.

However, July to September marked the third consecutive quarter of growth in first time outsourcing in the UK market. New requirements being brought to the market for the first time represented 64% of deals in Q3, up from 62% in the second quarter of the year and 59% in Q1 2014.

In addition, almost a quarter (24%) of agreements were either expansions or extensions of existing deals demonstrating a high proportion of successful BPO and IT Outsourcing (ITO) contracts in the UK.

The study also found year-on-year growth in onshore deals in Q3 2014. In total 76% of agreements were signed for services being delivered entirely from the UK, compared with 60% in the same period last year.

The local government sector remained a significant growth market, according to Arvato’s latest Index, with a 164% increase in deal value during the third quarter of 2014 compared to the same period last year.

Debra Maxwell, Managing Director of Arvato UK, said: “While the outsourcing industry has not yet matched the high levels of activity seen at the start of the year, our analysis of the third quarter of 2014 holds some promising signs for its health and contribution to the UK economy, in the sustained growth of first time outsourcing and onshore delivery.

“The local government sector, in particular, has bucked wider trends this quarter with continued growth in deal values compared to the same point in 2013. This shows that the outsourcing sector remains an essential partner to local authorities as they continue to deal with ongoing budget challenges.

“Meanwhile, in HR services, larger contract values reflect growing maturity in the sector, with outsourcing moving up the value chain to deliver more sophisticated solutions, beyond transactional services. The popularity of recruitment process outsourcing is a good example – with outsourcers increasingly involved in more judgment-based activities including candidate vetting and shortlisting.”

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